Kat from San Diego touched base and wanted to know the best way to invest for her child's future. Here's her question:

“My husband & I are looking into opening an investment/savings account for our 8 month son. 

We currently opened a separate savings for him via Ally & have a CD through a different bank. But we want something that offers a better opportunity for growth. 

What are your thoughts in regards to the 529, UGMA, UTMA, ESA, & a General Investment Account? What are your recommendations on where an account should be opened at?”

Kat, thanks for touching base with me! And congratulations for your new son and for this forward-thinking on his behalf. As you probably know, the earlier you invest, the more you can make. Time and compound interest are on your side. 

I have 3 thoughts when it comes to your question:

1. Think About Your Retirement Before Your Child’s Future

Before throwing down some money for your child’s future, give yourself a gut check. See if you are currently investing enough for your comfortable retirement. 

• Are you taking advantage of your company’s 401k match?
• Or investing in a Roth or Traditional IRA?
• How about your spouse?

The reason for this gut check is that there are no “retirement loans” but there are “student loans”. If you don’t invest enough for your retirement, you may need to live with your son 40 years from now!

Check out this compound interest calculator and see how you’re doing.

1. Insert your current retirement balance in “initial investment”
2. Include your average typical monthly contribution (be honest!)
3. Calculate how many years before you retire. (ex. If you're 30 today, you could put in 35 years which has you retiring at 65).
4. Put in a conservative 7% interest rate
5. Hit “Calculate”
6. Take that total amount and multiply it by 4% to understand how much you can safely live on in retirement. (ex. $1,000,000 x 4% = $40,000 per year)
7. Ask yourself if you can live on that amount comfortably in retirement. What do you think? Doable?

It’s more important to gauge your retirement planning success based on your annual expenses versus your income. 

The question to answer is … How much will we need to live in retirement? It’s a tough one to answer, but that’s the math problem that will help you decide how you’re doing today. 

2. Start with a 529 College Savings Account

Let’s say you’ve analyzed your retirement plans and you’re on the right track. Or you're feeling like you’ll hit Coast FIRE soon. Awesome!

More than a house or a wedding, a college education will help your child get the most opportunity in life. The average college graduate makes $30,000 more than those with only a high school education.

I would start there by opening a 529 College Savings Plan. 

This account will help you invest for your child’s future college needs. And with more time on your side, you’re going to benefit greatly from years of compound interest growth. 

529 College Savings Plans are helpful because they allow you to invest for college with after-tax dollars and your money grows tax-free. When you want to use the funds when your child goes to school, you can use the earnings tax-free and penalty-free as well.

This includes things like:

• Tuition
• Fees
• Books
• Supplies 
• Certain Room and Board Expenses

How do you find the right 529 plan?

I would start with your state 529 plan. Decide if there are benefits for being a resident of the state.

For example, in Michigan, we receive a state income tax deduction for our annual contributions. So we get to save a bit on taxes each year which is nice. 

California's 529 Plan, ScholarShare 529, does not have a state income tax deduction. It’s not a deal-breaker for sure, but there are other state plans you can invest in as well. 

What do you invest in with a 529 plan?

A lot of these plans invest with low-cost index funds to keep fees as low as possible. Not all state plans are equal though. Be sure to check the plan information before investing.

Some plans can also give you investment options that keep the process simple. For example, if your son will be enrolling for his first year in 2038, you can invest in the 2038 enrollment year plan.

In the beginning, you’ll be investing in more stocks and there's more potential for growth. As you get closer to 2038, you’ll invest in fewer stocks and safer and less volatile investments like fixed income or cash. 

How do I know how much to contribute to the 529 plan?

Well, you’ll have to find out how much it is going to cost when your son goes to college. On California’s 529 Plan website, there is a handy calculator that helps you to calculate your child's total college needs.

The calculator says your son’s college needs will amount to around $226,000 for an in-state public school in 2038.

Yes, that’s a lot of money so you might want to get started investing as soon as possible!

Take advantage of time, compound interest and any lump sum investments you can do early to help. Nicole and I put $10,000 in our daughter's 529 College Savings Plan when she was born. That’s helped a lot for our growth over the past 8 years. 

Now, if saving that much is not going to happen for you, no worries. Getting your child halfway or even a quarter of the way there is a HUGE milestone.

There are other options outside of the 529 College Savings Plan as well. These strategies can help your child to graduate college student debt free:

• Scholarships
• Kids working in high school to save money
• Kids working in college to pay tuition
• Attending community college for the first couple of years

Are you worried about saving too much? Thanks to the Secure 2.0 Act, now some unused funds in a 529 can be rolled into Roth IRAs!

3. Finish with a Custodial Brokerage Account (UTMA / UGMA)

After you’ve opened a 529 account for your child and are contributing enough to help them achieve their college dreams, you could also look into a custodial brokerage account. 

This money could be used for things like:

• Buying their first car
• A down payment on their first home
• Costs for their wedding
• Or anything else you can think of that’s important to you

Where can I get a custodial brokerage account?

Personally, I invest for my child's future with a UTMA account through Vanguard. I already have my IRAs there so it makes sense for me to keep it all in one place. 

Vanguard is not as user-friendly as some platforms because their app and website are not as convenient. I hope Vanguard invests more in their app or they're going to continue to lose out on new customers.

If you’re already a customer with a low-cost broker like Vanguard, Fidelity, or Schwab, check with them first. Discuss opening a “custodial brokerage account” or a “UTMA or UGMA”. That could be your best bet to keep things simple.

Final Thoughts: What is the Best Way to Invest for my Child's Future?

I hope those 3 steps make sense and are helpful Kat! 

As your child grows older, talk to them about these investments and why they are important for the future. If you want to grow generational wealth, it’s important that your son be given a legacy of knowledge and not just a legacy of wealth. 

According to MarketWatch, about 7 out of 10 wealthy families lose their fortune by the second generation. By the third generation, it jumps to 90%!

Why does this happen?!

I believe we give our children a huge gift without teaching them how to properly use the gift. 

Help your child understand the importance of hard work, how we make money, and how we save money. And as you’re demonstrating with this question today, how to invest money for the future as well. For more advice on how to do this, consider enrolling in our Make Your Kid a Millionaire course.

What do you think is the best way to invest for your child's future?

Please let me know in the comments below.